The State Pension and workplace pensions

The new State Pension applies to men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates is on the old basic State Pension with its own rules, including the additional State Pension and the ability to inherit or derive entitlement from a spouse. Those derivation rights largely disappeared under the new system, which is a significant loss for people who expected to rely on a partner's record.

Under the new system, entitlement is built from qualifying years of National Insurance. A qualifying year is one in which you paid enough contributions, were credited with them, or paid voluntarily. You normally need at least ten qualifying years to get anything at all, and the amount scales with the number of years up to the full rate.

The complication is 2016. Everyone with a record before 6 April 2016 has a starting amount calculated as the higher of what they would have got under the old rules and what they would get under the new ones, using their record up to that date. If the starting amount is below the full new rate, further qualifying years after 2016 add to it. If it is already above, the excess is protected as a payment on top but further years add nothing.

This is why the 35-year figure misleads. Someone with 30 years before 2016 might need eight more, not five. Someone with a long record who was contracted out — paying reduced National Insurance while building a workplace scheme benefit instead — will have a starting amount reduced by a Contracted Out Pension Equivalent, and may need several more years than they expect. Contracting out was extremely common in public sector and defined benefit schemes until it ended in 2016, so this affects millions of people.

The forecast on GOV.UK resolves all of this. It shows what you have built up, what you are on track for if you keep contributing, and how many more qualifying years would take you to the full rate. It is the only figure worth planning on, and checking it is free.

Living or working abroad complicates entitlement further. Time in a country with a reciprocal social security agreement can count towards qualifying years, and the State Pension is paid abroad — but it is only uprated each year in the UK, the European Economic Area, Switzerland and countries with a specific agreement. Retiring to a country without one freezes the payment permanently at the rate when you left.

Check your record on GOV.UK. It lists every year, marks each as full or not full, and shows the shortfall for incomplete years. Gaps commonly appear for years spent studying, working abroad, self-employed with low profits, working part-time below the earnings threshold, or caring without claiming the right benefit.

Before paying to fill a gap, check whether a credit applies instead — credits are free. National Insurance credits are awarded automatically with several benefits and can be claimed for periods of caring, receiving Carer's Allowance, being on statutory maternity or parental pay, claiming Jobseeker's Allowance or Employment and Support Allowance, or serving on jury service.

Two credits are routinely missed. Specified Adult Childcare Credit lets a grandparent or other family member who cares for a child under 12 claim the National Insurance credit attached to the parent's Child Benefit, where the parent is working and does not need it. And Child Benefit itself carries a credit for the parent looking after a child under 12 — which is why registering for Child Benefit and electing to receive no payment is worth doing even for high earners who would have the payment clawed back.

Where no credit is available, voluntary contributions can fill a gap. Class 3 contributions are the usual route for employees; Class 2 applies to some self-employed people and is cheaper. The rule of thumb is that voluntary contributions are usually good value if they take you to a year that actually increases your forecast — and worthless if they do not, which is the trap.

Check the forecast before paying, and check it again after. Paying for a year that falls before your 2016 starting amount, or that duplicates a year already full, buys nothing and is difficult to reclaim. HMRC and the Future Pension Centre will confirm whether a specific year will increase your entitlement, and it is worth the phone call before parting with money.

Time limits apply. You can normally pay voluntary contributions only for the last six tax years, with extended windows opened by government from time to time. A gap that ages past the limit becomes permanently unfillable, which makes checking your record in your forties and fifties considerably more useful than checking it at 65.

Find your State Pension age first. It is not 65 for anyone still working towards it, it depends on your date of birth, and it has been legislated to rise further. The GOV.UK checker gives your exact date, and it also gives the date you can access a private pension, which is different and earlier.

You should receive an invitation letter around two months before you reach State Pension age. If it does not arrive, do not wait. You can claim online, by phone or by post, and the claim can be made shortly before you reach pension age.

You will need your National Insurance number, bank details, and information about time spent abroad and any periods when you were not working. If you have been in another country's system, have the details ready — establishing entitlement across borders takes longer than a domestic claim.

Deferring is a genuine option, not a formality. If you do not claim, your State Pension is deferred automatically and the eventual payment is increased for each period of deferral. The uplift under the new State Pension is smaller than under the old system, so the arithmetic matters: deferral pays off only if you live long enough for the higher payments to make up the payments you gave up. Broadly, it favours people in good health with other income, and works against those relying on the money now.

Deferring also has knock-on effects. It can affect entitlement to means-tested benefits, and under the new State Pension you cannot take the deferred amount as a lump sum — only as a higher weekly rate. Anyone receiving Pension Credit should take advice before deferring, because the deferred State Pension may be treated as notional income anyway.

The State Pension is taxable income, but it is paid without tax deducted. Where you have other income, the tax due on the State Pension is usually collected by adjusting the tax code on that other income — which is why a lot of people are surprised by their tax code in the year they reach pension age. It is not an error.

Check Pension Credit at the same time. It tops up income for people over State Pension age on a low income, is claimed separately, and is heavily under-claimed. It also acts as a gateway to other help, including help with council tax and, since the rules changed, Winter Fuel Payment eligibility in England and Wales.

Automatic enrolment made it an employer duty rather than an employee choice. An employer must enrol every worker who is aged between 22 and State Pension age and earns above the earnings trigger, into a qualifying scheme, and must contribute. It is not an offer — enrolment happens and you have to actively opt out to leave.

Contributions are calculated on qualifying earnings, which is a band: earnings between a lower and an upper limit, not your whole salary. This is why the amount deducted looks smaller than the headline percentage suggests, and it is also why the total going in is less than most people assume when they picture a percentage of full pay. Many employers use a more generous basis, and it is worth reading your scheme's rules rather than assuming the statutory minimum.

Tax relief means part of the contribution comes from money that would otherwise have gone to HMRC. How that works depends on the scheme. Under 'relief at source', basic rate relief is added by the provider and higher and additional rate taxpayers must claim the rest through Self Assessment — a claim that is very commonly missed. Under 'net pay', the contribution comes out before tax so full relief is automatic, but very low earners below the personal allowance can lose out.

Opting out is where the real money is lost. Leaving the scheme saves your own contribution and forfeits the employer's contribution and the tax relief. The arithmetic is not close: you are giving up money that only exists if you stay in, to keep a smaller amount of your own. There are situations where it is defensible — severe short-term hardship, or being close to the pensions lifetime tax limits — but 'I cannot afford it' usually means the household budget needs looking at rather than the pension.

If you opt out within the opt-out period your contributions are refunded. Opt out later and the money generally stays invested until you can access a pension. You are also re-enrolled automatically roughly every three years, which is deliberate — the policy assumes people who opted out in a difficult year may be able to afford it later.

Workers who are not automatically enrolled still have rights. If you are aged 16 to 74 and earn above the lower earnings threshold but below the trigger, you can ask to opt in and the employer must contribute. Below that, you can still ask to join, though the employer is not required to pay in. Part-time workers with several jobs are the group most often left outside auto-enrolment despite substantial total earnings, and asking to opt in is the fix.

Track down old pensions. Most people accumulate several small pots across a working life, and providers lose contact when people move house. The government's Pension Tracing Service finds contact details for schemes from an employer or provider name, free of charge.

Workplace pensions come in two fundamentally different shapes and the difference determines everything about how you should treat them.

A defined benefit scheme — final salary or career average — promises an income in retirement based on your salary and service, and the employer carries the investment risk. You do not own a pot; you own a promise. Public sector schemes for the NHS, teachers, civil service, police and armed forces are defined benefit, as are older private schemes. They are generally very valuable and the risk of giving one up is asymmetric.

A defined contribution scheme is a pot of money. Contributions are invested, the value goes up and down with markets, and at retirement you have whatever is there. You carry the investment risk. Almost every scheme opened through automatic enrolment is defined contribution.

Transferring out of a defined benefit scheme into a defined contribution one converts a guaranteed income into a pot of money with no guarantee. Transfers above a value threshold legally require advice from a regulated adviser, precisely because this decision has been the subject of significant consumer harm. Treat any unsolicited approach offering to help you transfer a final salary pension as a scam until proved otherwise.

With a defined contribution pot, the decisions at retirement are yours. You can normally take part of it as a tax-free lump sum, and then buy an annuity for a guaranteed income, draw down flexibly, or take lump sums as needed. Each has different tax and longevity consequences, and taking taxable money flexibly triggers a reduced annual allowance for future contributions — which matters if you plan to keep working.

The default investment fund is where most auto-enrolment money sits, and it is the one thing worth actually looking at. Defaults are designed for an average member and typically shift towards lower-risk assets as you approach a target retirement date that may not be your actual one. Checking your target date, your fund choice and the charges is a fifteen-minute job with a real effect over decades.

Free, impartial guidance is available. MoneyHelper, which absorbed Pension Wise, offers appointments for people aged 50 and over with defined contribution pensions. It is not regulated financial advice, but it is free, independent of any provider, and covers the options before you commit to any of them.

In your twenties and thirties, the only two things that matter are staying enrolled and not cashing out small pots when changing jobs. Time in the market does the work. Increasing the contribution rate by a couple of points when you get a pay rise is the single most effective habit, because you never see the money as spendable income.

In your forties, check your National Insurance record for the first time. This is early enough that any gaps found are still within the window to fill, and it is when most people discover the years lost to study, travel, low-paid self-employment or caring. Also consolidate the pots you have lost track of, or at least locate them.

In your fifties, check your State Pension forecast and your State Pension age together. Both are needed to work out the gap between when you want to stop working and when the state starts paying. That gap has to be funded from private pensions and savings, and it is the number that determines whether current contributions are enough.

Ten years out, look at the default fund's target retirement date and correct it if it does not match your plan. A fund de-risking towards a date five years before you actually retire, or five years after, is a real cost that nobody will tell you about.

At any age, if you are a higher or additional rate taxpayer in a relief at source scheme, check whether you have claimed the extra tax relief through Self Assessment. It is not automatic, it is claimable for earlier years within the time limits, and it is one of the most commonly missed tax claims in the country.

And if someone contacts you unprompted about your pension — a free review, a transfer opportunity, an unusual investment, early access before the normal minimum pension age — treat it as a scam. Cold calling about pensions is banned, and 'pension liberation' schemes that promise access before the minimum age generally result in the loss of the fund and a substantial unauthorised payment tax charge on top.